[opendtv] Re: Analysis: Broadcast's $1 Billion Pot of Gold
- From: Craig Birkmaier <craig@xxxxxxxxx>
- To: opendtv@xxxxxxxxxxxxx
- Date: Mon, 14 Jul 2008 23:40:53 -0400
At 10:45 AM -0400 7/14/08, John Shutt wrote:
Please see inline.
----- Original Message ----- From: "Craig Birkmaier" <craig@xxxxxxxxx>
An interesting question. The total is very significant, but much of
this subscriber revenue comes from optional digital tiers that
consumers can elect to subscribe to.
As opposed to the 'mandatory basic cable' that every US citizen is
required to purchase? All cable is elected to be subscribed to by
consumers.
Nice comeback John, but there is a huge difference here. The cable
industry has spent years focused on the extended basic tier. The
digital tiers did not exist until the late '90s on cable, about 1996
for DBS. Over those years people came to expect new channels from
their cable systems with each facilities upgrade. There was a BIG
jump in the number of channels when systems upgraded to 550 MHz;
prior to that most cable systems had no more than 40 channels, some
of which were scrambled premium services requiring a cable system
STB. The industry is also quick to point out that the major reason
for the price increases (since 1992) is directly tied to the
availability of more channels in the extended basic tier.
When systems upgraded to 700 MHz (or higher) things started to
change. The biggest change was the addition of digital tiers and
cable modems. Many of the new digital tier channels were created by
existing cablecasters like Discovery. And a large number of new
regional sports channels were also created. These tiers are sold more
like a premium channel, and I strongly suspect that the channels
within a tier get larger subscriber fees, as the total number of
subscribers is relatively small when compared to the number of
subscribers to extended basic.
So in a sense, the cable industry would have us believe that the
digital tiers are closer to the model of ala carte that would exist
if they were forced to offer it.
I think it would be fair to say that Discovery Networks would not
have created so many new channels if they could only have been
included in the extended basic tier. it is also important to note
that once you have a large NOC (Network Operations Center), and you
are creating content to populate 4 of 5 networks, the incremental
cost to launch a new network (that reuses some of the programming you
are already using on other channels) is relatively small.
I can assure you that most of the mainstream Discovery channels
could operate profitably without subscriber fees.
Perhaps, but I'm willing to bet not with the same number of channels
offered or the same number (and quality) of original programs
produced.
I agree. As I stated above, I think many of the newer Discovery
Channels were created specifically to populate digital tiers for
which Discovery collects larger subscriber fees. As for the quantity
of original programming, I doubt it would be any different if they
could not collect subscriber fees. The average cost of each episode
of Discovery Network shows is not that large to begin with ( I
believe it is in the range of $25,000 to $30,000 per half hour).
Why would they do something stupid like this? The NORM in the U.S.
is double dipping. Only market forces could change this, and they
are insulated from market forces by the actions of government that
make the double dipping possible.
As I posed in my question to you, the incentive to do this to gain
access to a valuable slot in the expanded basic tier. The Craig
Channel wants to be in the expanded basic tier of BerTV, so they
offer a channel with no subscriber fees, and Bert gets to keep more
money. So Bert kicks off The John Channel, who was demanding $1.50
per sub.
Not certain where you are going with this. It is important to
remember that the cable industry created this beast, charging
subscriber fees for the new networks they created to compete with
Broadcast Television. The reality is that the cable industry loves
subscriber fees as much as the broadcasters who now want in on this
gravy train. There are several reasons for this:
1. Leveraging the float: perhaps the most important economic engine
for the cable industry (and DBS too) is the ability to gain leverage
off of the huge cash flow that is generated. Higher average monthly
revenues per subscriber translate into a larger cash float that they
can invest and make more money off of. I do not have any privileged
information about retrans consent agreements, but I would strongly
suspect that the cable companies hold onto these fees long enough to
make a few bucks off of the float.
2. Piling on: it is easy to blame the media conglomerates for each
new rate increase, thanks to the publicity that surrounds the
infrequent events where a channel is pulled from a system due to a
squabble over subscriber fees. But each time the rates go up, the
cable systems MORE THAN COVER the increased subscriber fees. This is
a wonderful gimmick for all parties involved. Everyone is pointing
fingers at the other guy as rates keep increasing at a pace that is
significantly greater than inflation.
I'm sorry, Craig, I did not make myself sufficiently clear. A
channel with no ads and a small subset of all subscribers goes for
$10 per month, who knows how much of that HBO sees. A channel with
ads and a universe of just about all subscribers goes for
$0.10-$1.00 per month to the program provider. (I have no idea what
the current per sub charges are, but it's in that range for most
channels, I'm sure.)
The average is in the range you cited, with more at or below $0.50
per month than above this level. Only a handful of popular channels
can charge between $0.50 and $1.00. And then there is ESPN, which
averages around $2.70 per month.
Point being, HBO has a much smaller subscriber universe AND no ad
revenue, which explains the high per sub cost. Expanded basic
channels have a lower per sub cost because they get revenue for
almost every subscriber in the system, AND they have supplemental ad
revenues. Take away the number of subscribers from the equation
(because of ala carte, assuming that <100% of current subscribers
elect to take the channel) and in order for revenue to the program
provider to remain constant, per sub fees have to do what? Go up.
Therefore, ala carte is very likely to increase per sub costs, and
lower any potential "savings" seen by the consumer. Exactly how
much is beyond my financial projection abilities, but the trend line
seems clear.
This is the line that the cable industry keep using. On the surface
it makes sense. But the logic is flawed. if the subscriber fees go up
to compensate for those who do not subscribe you can get into a nasty
downward spiral where more and more people choose not to pay for that
channel. At the same time, ad revenues will start to decline as fewer
people watch that channel.
As I stated previously, many of these channels cannot afford to lose
potential channel surfers who may stumble into something interesting
and watch. So I believe that many of these channels would have little
choice but to drop the subscriber fees so that they would not be
dropped by viewers. The good news is that they might gain even more
occasional viewers by dropping subscriber fees and competing for
eyeballs with a smaller total number of channels coming into the
home. I may be wrong, but I don't think so.
And then there is another important reality. The TV business is being
challenged on multiple fronts. Revenues are not stable or growing for
most of the players. Ala carte would create a more competitive
playing field and this suggests that margins might need to be reduced
for those who want to keep playing.
Bottom line, I don't think that most of these channels can risk
raising prices for a smaller audience.
I do not buy this argument. I believe that the license fees are
there to keep the BBC free of ads. In this they are more like HBO.
The license fees were there before Freeview and Freview will most
likely exist AFTER the UK pulls the plug on the funding of the BBV,
which is now fully capable of sustaining itself via distribution to
global markets.
I know we have agreed to disagree over this point in the past, and
will have to continue to do so. The transmission infrastructure was
originally built out by the Beeb, then ITV and others coattailed
onto that infrastructure at a later date. The switch to digital has
just perpetuated that practice. It is the model that you base your
transmission utility proposal on. Beeb is the number one user of
the transmission system, and a guaranteed tennant. Because of that,
other tennants can be offered a lower rate than if they had to site,
build, and maintain their own transmission network, as is the case
here in the US.
I'd like to know more about this. I though most of the license fee
was to pay for content not infrastructure. The BBC did not build the
infrastructure; that responsibility was given to a third party that
gets payments from the BBC, and the commercial channels. Obviously
one could conclude that some of the license fee is used by the BBC
to pay for the use of the transmission infrastructure. Anyone with
more detailed info on who pays for what is encouraged to contribute
to this discussion.
If the Beeb went out of business tomorrow, and all TV Licensing fees
ended, do you think that the rest of those Freeview channels and the
Freeview transmission network would survive in its current form?
YES!
Regards
Craig
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